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Strong Demand, Acquisitions to Drive Reliance Steel (RS)

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We issued an updated research report on metals service center company, Reliance Steel & Aluminum Co (RS - Free Report) on Mar 20.

Reliance Steel is gaining from its broad and diversified product base, wide geographic footprint, continued demand strength across aerospace and automotive markets and synergies of acquisitions.

Demand in the aerospace market has been driven by higher commercial aerospace build rates. The company remains committed to boost its market share in aerospace. Strong demand is also witnessed in the automotive market, backed by increased use of aluminum in the industry.

Reliance Steel, in its fourth-quarter call, said that it is optimistic about business conditions for the first quarter of 2019. It expects demand to be healthy in the first quarter and projects tons sold to be up 6-8% sequentially in the quarter. The company also expects price hikes for many of its products based on current demand levels, impact of ongoing trade actions and raw material costs.

The company’s average selling prices increased 20% year over year in fourth-quarter 2018. Section 232 trade actions on imported steel coupled with strong demand led to higher metal pricing in the quarter. Higher metal pricing also largely helped the company to generate strong gross profit margin in 2018.

The Trump administration’s Section 232 actions have provided much-needed protection to the American steel producers including Nucor Corp. (NUE - Free Report) , United States Steel Corp. (X - Free Report) and AK Steel Holding Corp. (AKS - Free Report) which had long struggled to cope with a tide of subsidized foreign imports. The tariffs are leading to lower imports into the United States and have provided a boost to U.S. steel prices.

Reliance Steel also continues with its aggressive acquisition strategy to tap growth opportunities. With the takeover of Metals USA, the company has added about 48 service centers throughout the United States. The buyout of Tubular Steel also boosts the company's long-term growth strategy and strength by expanding its product portfolio and end market diversification. Moreover, the acquisition of Best Manufacturing Inc. highly complements the company's service center network with specialty high-margin products, strong focus on customer service and value-added processing capabilities.

Reliance Steel, in November 2018, also completed the purchase of all of the membership interests of All Metals Holding, LLC, including its operating subsidiaries, All Metals Processing & Logistics, Inc. (“AMPL”) and All Metals Transportation and Logistics, Inc. (“AMTL”).

Per the company, the buyout complements its growth strategy and meets its criteria of buying high quality businesses that are immediately accretive to its earnings. All Metals’ focus on high return, toll processing and logistics services further bolsters Reliance Steel’s solid position in these areas.
 
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